Improving the tax to GDP ratio

The tax service month is going on with the NBR eyeing two million return submission according to a recent TBP report.

Currently it is mandatory for citizens to submit proof of their return submissions to get more than 37 types of services, including loans and trade licenses. Besides, the government has announced facilities this FY for TIN holders who have never filed their tax returns before, says the report.

Tax evasion is widespread, always has been, and probably always will be. There is an old saying among tax professionals that “the poor evade, and the rich avoid,” meaning that the rich tend to reduce their taxes through legal “avoidance” measures such as tax shelters, while those with lower incomes attempt more outright evasion. Tax noncompliance seems related to some other observable characteristics of taxpayers. Bangladesh's tax to GDP ratio is one of the lowest in the South Asian region. Close studies show that high tax rates, multiple tax rates, complexity of tax laws, corruption among tax payers and collectors and inefficient tax authorities are the main causes of high tax evasion in Bangladesh. As many as two-thirds of the eligible taxpayers evade taxes. Tax evasion occurs when individuals deliberately do not comply with their tax obligation. Cuts in tax rates, simplifications of tax laws, removing loopholes in the tax system and proper processing of information available under the annual information return are seen as the best tools for improving tax compliance. There is also a need to educate the people and their elected representatives about the tax law and create taxpayer-friendly environment such that they pay their due taxes, do not evade the tax and feel proud in making a financial contribution to nation-building.

The size of the informal economy remains large despite structural transformation from agriculture towards more formal industry and services. For instance, over 85 per cent of total employment is informal employment. Income generated by the operators in the sector, in many cases, is not officially captured in the tax net of the NBR. Informal sector forms the greater percentage of tax defaulters, increasing cases of tax evasions. The revenue potential from the informal sector comes with significant administrative costs due to a large number of informal firms and entrepreneurs and the difficulties in monitoring them. Also, many firms often prefer to remain informal to avoid the regulatory complexities that come with formalization. The SoEs in Bangladesh, the public sector entities and projects do not pay tax in proper amount and on time. There has been a huge amount of tax dues returnable to NBR.

An important way to study the tax gap is to examine the size of the tax gap in a country by analyzing the size of the underground economy and its influencing factors. The size of the underground economy is directly related to the institutional infrastructure. The institutional infrastructure of a country mainly includes the intensity of government regulation, the establishment and implementation of laws, the degree of judicial independence, the size of effective tax rates, the effective provision of public goods or services, and the effective protection of property rights. It is generally believed that the higher the level of government regulation, the greater the size of its underground economy and the greater the tax gap and vice versa. When government over-regulation occurs, an alternative relationship exists between the size of the underground economy and the size of the official economy.

Some believe that higher tax rates can raise higher tax revenues, and the government can provide higher levels of public services accordingly, thereby attracting more companies and individuals out of the underground economy, resulting in a healthy balance of “high tax rates, high taxes, high public services, and small-scale underground economy,” but low-tax countries, because they do not have enough income to provide high levels of public services, will form a vicious balance of "low tax rates, low taxes, low public services, and high-scale underground economy." In the above-mentioned healthy balance, the tax gap is relatively small; in the vicious equilibrium, the tax gap is relatively large.